| FTI CONSULTING INC ITEM 1A RISK FACTORS In addition to the factors discussed elsewhere in this report, the following are some of the important factors that could cause our actual results, future operations and financial performance to differ materially from those mentioned in our forward look statements |
| Our failure to retain qualified professionals or hire additional qualified professionals would have a negative effect on our future growth and financial performance as well as on client engagements, services and relationships |
| Our business involves the delivery of professional forensic/litigation/technology, corporate finance/restructuring and economic consulting services |
| In the consulting business, professional acumen, trust and relationships are critical elements of a company’s ability to deliver high quality professional services |
| Our professionals have highly specialized skills |
| They also develop strong bonds with the clients they service |
| Our continued success depends upon our ability to attract and retain our staff of professionals who have expertise, reputations and client relationships critical to maintaining and developing our business |
| We face intense competition in recruiting and retaining highly qualified professionals that we must employ to continue our service offerings |
| As of December 31, 2005, substantially all of the senior managing directors had written employment agreements with us |
| Many of our employment agreements will expire between 2006 and 2008 because of the timing of our acquisitions and our 2004 initiative to enter into written agreements with our senior professionals |
| We monitor these expirations carefully to commence dialogues with professionals regarding their employment well in advance of the actual contract expiration dates |
| Our goal is to renew employment agreements when advisable and to stagger the expirations of the agreements if possible |
| Because of the high concentration of contract expirations between 2006 and 2008, we may experience high turnover or other adverse consequences, such as higher costs, loss of clients and engagements, or difficulty staffing engagements, if we are unable to renegotiate employment arrangements or the costs of retaining qualified professionals become higher |
| We cannot assure you that we will be able to attract and retain enough qualified professionals to maintain or expand our business |
| Moreover, competition has been increasing our costs of retaining or hiring qualified professionals, a trend which could harm our operating margins and results of operations |
| We have begun to focus on renegotiating new long-term employment agreements with key senior managing directors |
| In connection with those discussions, we may offer a senior managing director the opportunity to participate in all or a portion of the benefits under an incentive compensation package that includes cash, which may be in the form of an unsecured general recourse forgivable loan, and significant additional payments upon the execution and during the term of such employment agreement in the form of stock option and restricted stock awards or, alternatively, cash equivalents if we do not have adequate equity securities available under stockholder approved equity plans |
| Any new employment agreements entered into with senior managing directors may not have staggered termination dates, so that we could face similar retention issues at the end of the terms of those agreements, although this risk could be reduced in light of our intention to include automatic one-year renewal options in the revised form of employment agreement beginning at the end of their initial terms unless either party provides to the other prior notice that he or us do no not intend to renew |
| While we hope that we enter into new long-term employment agreements with a significant number of senior managing directors, we have not yet and there is no assurance we will do so |
| The aggregate principal amount of all loans made to senior managing directors through 2006 could exceed dlra50dtta0 million, of which some or all of the principal amount and accrued interest could be forgivable by us upon the passage of time, while complying with contractual requirements, or certain other events, such as death or disability or termination by us without cause or by the employee with good reason |
| If all the other compensation features described above were to be implemented, the equity awards to such senior managing directors would also be significant |
| 18 ______________________________________________________________________ [39]Table of Contents Our clients may preclude us from representing multiple clients in connection with the same engagement or competitive matter; our other practices may be precluded from accepting engagements from clients with respect to the same or competitive matter for which another practice has been engaged to provide services; and to forego potential business prospects in order to win engagements, which could harm our revenues, results of operations and client relationships and engagements |
| We follow internal practices to assess real and potential issues in the relationships between and among our clients, engagements, practices and professionals |
| For example, we generally will not represent parties adverse to each other in the same matter |
| Under bankruptcy rules, we generally may not represent both a debtor and its creditors in the same proceeding |
| Under federal bankruptcy laws, we are required to notify the US Trustee of real or potential conflicts |
| The US Trustee could find that we no longer meet the disinterestedness standard because of real or potential changes in our status as a disinterested party, and order us to resign |
| In preference actions under bankruptcy law, we could be required to disgorge fees |
| New acquisitions may result in us resigning from a current client engagement because of relationship issues that are not currently identifiable |
| In addition, businesses that we acquire may not be free to accept engagements they could have accepted prior to our acquiring them because of relationship issues |
| Our inability to accept engagements from clients or prospective clients, represent multiple clients in connection with the same or competitive engagements, and any requirement that we resign from client engagements may negatively impact our revenues, revenue growth and results of operations |
| If our former professionals go into business in competition with us or join our competitors, our client engagements and relationships could decline, financial performance and growth could slow or decline, and employee morale could suffer, and we may not have legal recourse |
| Typically, our professionals have a close relationship with the clients they serve, not only based on their expertise but also on bonds of personal trust and confidence |
| Although our clients generally contract for services with us as a company, and not with individual professionals, in the event that professionals leave, such clients would not be prohibited from hiring those professionals to perform future engagements |
| Clients could also decide to transfer active engagements to professionals who leave |
| The engagement letters that we typically enter into with clients do not obligate them to continue to use our services |
| Typically, our engagement letters permit clients to terminate our services at any time |
| Furthermore, while in some cases, the termination of an ongoing engagement by a client could constitute a breach of the client’s contract with us, we could decide that preserving the overall client relationship is more important than seeking damages for the breach, and for that or other reasons that are not currently identifiable, decide not to pursue any legal remedies that might be available to us |
| We would make the determination whether to pursue any legal actions against a client on a case-by-case basis |
| All of our written employment agreements with our senior managing directors include non-competition and non-solicitation arrangements |
| These non-competition agreements have generally been drafted to comply with state “reasonableness” standards |
| However, states generally interpret non-competition clauses narrowly |
| Therefore, a state may hold certain restrictions on competition to be unenforceable |
| In the case of former Ringtail employees residing in Australia, the non-competition provisions have been drafted to comply with Australian law |
| In the event an employee departs, we will consider any legal remedies we may have against such professional on a case-by-case basis |
| However, we may decide that preserving cooperation and a professional relationship, or other concerns, outweigh the benefits of any possible legal recovery |
| Therefore, we may determine not to pursue legal action, even if available |
| In the first quarter of 2004, we experienced the unanticipated departures of about 60 professionals in our former FTI/Policano & Manzo restructuring practice |
| We have strived to build relationships and reassure our professionals and clients of our interest in them and our ability to provide services comparable to those provided by the departing professionals |
| Those departures had a negative impact on our financial results for 2004 |
| In the fourth quarter of 2004, we entered into a monetary settlement of arbitration proceedings brought against those former employees and the company they formed to compete with us |
| 19 ______________________________________________________________________ [40]Table of Contents Our profitability will suffer if we are not able to manage utilization and pricing rates of our professional staff |
| We calculate the utilization rate for our professional staff by dividing the number of hours that all of our professionals worked on client assignments during a period by the total available working hours for all of our professionals, assuming a 40-hour work week and a 52-week year |
| Available working hours include vacation and professional training days, but exclude holidays |
| The hourly rates we charge our clients for our services and the number of hours our professionals are able to charge our clients for our services are affected by the level of expertise and experience of the professionals working on a particular engagement and, to a lesser extent, the pricing and staffing policies of our competitors |
| If we fail to manage our utilization rates for our professionals or maintain or increase the hourly rates we charge our clients for our services, we may experience adverse consequences, such as non-revenue generating professionals, the loss of clients and engagements and the inability to appropriately staff engagements, and our profitability will suffer |
| For example, demand for our corporate finance/restructuring professionals declined in early 2004 primarily as a result of general economic conditions, including the strengthening of the economy, the availability of credit, low interest rates, fewer mergers and acquisitions and fewer large bankruptcy proceedings |
| Our operating profit margins declined in 2004 due to the slow down in our corporate finance/restructuring business and due to lower utilization rates in that practice and our recently acquired businesses relative to our historical experiences |
| We also experienced lower utilization in our forensic/litigation/technology practice during late 2003 and the early part of 2004 resulting from the absorption of the professionals who joined us in connection with our acquisition of the dispute advisory services of KPMG LLP Many of the billable professionals that resigned during the first quarter of 2004 were among our highest utilized and billing professionals, which also contributed to our lower utilization rates and operating profit margins in 2004 |
| During the year ended December 31, 2005, our overall utilization rate improved as compared to 2004 primarily due to larger client assignments and more robust market conditions in 2005 |
| We rely heavily on our senior management team and practice leaders for the success of our business |
| We rely heavily on our senior management team and practice leaders to manage our practices |
| Given the highly specialized nature of our services and the scale of our operations, these people must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage a large organization |
| If one or more members of our senior management team or our practice leaders leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in managing our business properly, and this could harm our business prospects, client relationships, employee morale and results of operations |
| Any claims involving the quality of our services could harm our overall professional reputation, which could harm our ability to compete for new business opportunities, retain and attract clients and engagements, and hire and retain qualified professionals |
| Many of our engagements involve complex analysis and the exercise of professional judgment |
| Therefore, we are subject to the risk of professional liability |
| Often, our engagements involve matters that, if resolved unfavorably, may result in a severe impact on the client’s business, cause the client a substantial monetary loss or prevent the client from pursuing business opportunities |
| Since our ability to attract new clients and generate engagements depends upon our ability to maintain a high degree of client satisfaction as well as our reputation among industry professionals, any claims against us involving the quality of our services may be more damaging than similar claims against businesses in other industries |
| We do not generally indemnify our clients; however, in certain cases, such as with clients who are governmental agencies or authorities, we may agree to indemnify them and their affiliates against third party liabilities |
| Indemnification provisions are negotiated on a contract-by-contract basis and in some cases may be reciprocal or may be coupled with limitations on the amount and type of damages that can be recovered |
| 20 ______________________________________________________________________ [41]Table of Contents Any claim by a client or a third party against us could expose us to professional or other liabilities in excess of our insurance limits |
| We maintain a limited amount of liability insurance |
| The damages and/or expenses resulting from any successful claims against us, for indemnity or otherwise, in excess of our insurance limits would have to be borne directly by us and could seriously harm our profitability, financial resources and reputation |
| Our clients may terminate our engagements with little or no notice, which may cause us to experience unexpected declines in our profitability and utilization |
| Much of our business involves large client engagements that we staff with a substantial number of professionals |
| The engagement letters that we typically enter into with clients do not obligate them to continue to use our services |
| Typically, our engagement letters permit clients to terminate our services at any time |
| If our clients unexpectedly cancel engagements with us or curtail the scope of our engagements, we may be unable to replace the lost revenues from those engagements, quickly eliminate costs associated with those engagements, or quickly find other engagements to utilize our professionals |
| Any decrease in revenues without a corresponding reduction in our costs will likely harm our profitability |
| We face intense competition in our business |
| If we fail to compete effectively, we may miss new business opportunities or lose existing clients and our revenues and profitability may decline |
| Parties from whom we acquire assets may reenter the marketplace to compete with us in the future |
| The market for our consulting services is highly competitive |
| Our competitors range from large organizations, such as the national accounting firms and the large management consulting companies that offer a broad range of consulting services, to small firms and independent contractors that provide one specialized service |
| Some of our competitors have significantly more financial resources, larger professional staffs and greater brand recognition than we do |
| Since our business depends in a large part on professional relationships, our business has low barriers of entry for professionals wanting to start their own firms |
| In addition, it is relatively easy for professionals to change employers |
| We cannot assure you that we will continue to compete successfully for new business opportunities or retain our existing clients or professional employees |
| In connection with our acquisitions, we generally obtain non-solicitation agreements from the professionals we hire as well as non-competition agreements from senior managers and professionals |
| In some cases we enter into non-competition or non-solicitation arrangements generally with sellers |
| We cannot assure you that any one or more of the parties from whom we acquire assets or a business who do not join us, or persons who join us if upon expiration or breach of their agreements not to compete or solicit will not compete with us in the future |
| Also, the duration of those agreements are limited ranging from three to eight years after the acquisition date |
| Certain activities may be carved out of or otherwise may not be prohibited by those arrangements |
| Also, in some cases we may agree to restraints on our ability to compete with the sellers of those businesses with respect to certain practice areas or locations |
| Competition may harm our expected revenues growth and results of operations and cause the actual profitability of the business to differ materially from our expectations and the expectations of the investing public |
| A failure to meet these expectations could cause the price of our stock to decline |
| In connection with the acquisition in 2002 of certain assets and liabilities of the US Business Recovery Services (“BRS”) division of PricewaterhouseCoopers LLP (“PwC”), we obtained a three-year agreement from PwC not to compete with us |
| On December 23, 2003, we filed an action in the Supreme Court of the State of New York against PwC seeking enforcement of the non-competition covenants, damages, and injunctive and other equitable relief |
| On November 3, 2004, we entered into a settlement and release in the action, which enforced the non-compete until August 31, 2005 |
| We may have difficulty integrating our acquisitions, or convincing clients to allow assignment of their contracts to us, with a consequent detrimental effect on our financial results |
| The process of integrating our acquisitions into our existing operations may result in unforeseen operating difficulties and may require significant financial, operational and managerial resources that would otherwise be 21 ______________________________________________________________________ [42]Table of Contents available for the operation, development and expansion of our existing business |
| To the extent that we have miscalculated our ability to integrate and properly manage any or all of our acquisitions, we may have difficulty in achieving our operating and strategic objectives |
| A substantial amount of our growth has been due to acquisitions |
| During 2003, we completed three significant acquisitions: Lexecon, the former dispute advisory business of KPMG LLP and Ten Eyck, all of which occurred in the fourth quarter |
| On February 28, 2005, we acquired substantially all of the assets and assumed certain liabilities of the Ringtail group |
| Ringtail is a leading developer of litigation support and knowledge management technologies for law firms |
| On May 31, 2005, we acquired substantially all of the assets and assumed certain liabilities of Cambio from certain of the individual owners of Cambio Partners, the direct parent of Cambio, and certain of its investors |
| Cambio is a leading provider of change management solutions for hospital and health systems |
| On January 6, 2006, we completed our acquisition of Competition Policy Associates, Inc, which we refer to as Compass |
| Compass is one of the top competition economics consulting firms in the world, with office in Washington, DC and San Francisco |
| Compass provides services that involve sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim |
| All of these acquisitions at this time, except Compass, have been substantially integrated with FTI Some of the integration challenges we face include differences in corporate cultures and management styles, additional or conflicting government regulation, disparate company polices and practices and client conflict issues |
| All of our acquisitions in 2003, our Ringtail and Cambio acquisitions in 2005 and a portion of our Compass acquisition in 2006 were structured as asset transactions |
| Asset transactions generally necessitate receipt of third party consents to assign client engagements |
| All clients might not affirmatively consent to an assignment |
| In addition, in some cases there are no written client contracts memorializing an engagement |
| Such engagements will only continue at the pleasure of those clients |
| In certain cases, such as government contracts and bankruptcy engagements, the consents of clients cannot be solicited until after the acquisition has closed |
| Further, such contracts may be subject to security clearance requirements or bidding provisions with which we might not be able to comply |
| There is no assurance that local, state and federal governments will agree to novate their contracts to us |
| In addition, in an engagement that involves a bankruptcy case, we must make a filing with the applicable US Trustee, at which time such US Trustee may find that we are no longer disinterested |
| In connection with such bankruptcy cases, we may be required to resign and to refund fees collected in connection with those engagements |
| We could be responsible for returning fees even if they were not paid to us, but rather to the company from whom we acquired the business |
| In some cases, we may not have legal recourse to demand that the seller of the business reimburse us |
| Our corporate finance/restructuring practice has an increased risk of fee non-payment |
| We recognize that these clients may not have sufficient funds to continue operations or to pay for our services |
| We typically do not receive retainers before we begin performing services on a client’s behalf in connection with a significant amount of our corporate finance/restructuring business |
| In the cases that we have received retainers, we cannot assure you that the retainers will adequately cover our fees for the services we perform on behalf of these clients |
| We are not always able to obtain retainers from clients in bankruptcy as the bankruptcy court must approve our retainers for those clients |
| Even if a bankruptcy court approves our retainer or engagement, a bankruptcy court has the discretion to require us to return all, or a portion of, our fees |
| Therefore, we face the risk of non-payment, which can result in write-offs |
| For the three years ended December 31, 2005, we wrote off a total of dlra18dtta8 million, of uncollectible fees in all practices |
| Our total write-offs exclude unbilled fee adjustments and amounts attributable to our applied sciences practice, which we sold in 2003 |
| More write-offs than we expect in any period would have a negative impact on our results of operations |
| 22 ______________________________________________________________________ [43]Table of Contents If the size, complexity and number of debt defaults, bankruptcy or restructuring actions or other factors affecting demand for our corporate finance/restructuring services declines, or if economic conditions beyond our control result in a reduced demand for our forensic, economic, technology and other services, our revenues and profitability could suffer |
| Our corporate finance/restructuring practice provides various restructuring and restructuring-related services to companies in financial distress or their creditors or other stakeholders |
| A number of factors outside of our control affect demand for our services |
| These include: • the availability and level of lending activity, interest rates and over-leveraging of companies; • over-expansion by various businesses; • merger and acquisition activity; • management problems; • governmental regulations; and • other general economic factors resulting in the decline in the economy in the US Notwithstanding increases in debt, we have also seen a decline of the mega-bankruptcy cases, resulting in a greater portion of our business being comprised of engagements relating to bankruptcy and restructuring matters involving mid-size companies, primarily as a result of general economic conditions, including the strengthening of the economy, the availability of credit and low interest rates |
| In our experience, mid-size bankruptcy and restructuring engagements are more susceptible to cyclical factors such as holidays and vacations |
| The shift to mid-size engagements could result in lower utilization during the third and fourth quarters of any year due to these factors |
| Declines in demand for our restructuring, turnaround and bankruptcy services as well as smaller engagements could result in lower revenues and decrease our overall profitability |
| Our other practice groups, including forensic, litigation and economic consulting, also are driven by crisis situations that affect companies but which are outside of our control |
| We are not able to predict the effect future events or changes to the US or global business environment could have on our operations |
| Changes to any of the factors described above as well as other events, including by way of example, tort reform, changes to laws and regulations, including recent changes to the bankruptcy code, decline in government enforcement, and alternative dispute resolution practices, or a decline in litigation, and declines in monetary damages or remedies that are sought, may have an adverse effect on one or more of our businesses |
| If we fail to find suitable acquisition candidates, or if we are unable to take advantage of opportunistic acquisition situations, our ability to expand may be curtailed |
| The number of suitable acquisition candidates may decline if the competition for acquisition candidates increases |
| As a result, we may be unable to make acquisitions or be forced to pay more or agree to less advantageous acquisition terms for the companies that we are able to acquire |
| Alternatively, at the time an acquisition opportunity presents itself, internal and external pressures (including, but not limited to, borrowing capacity under our senior secured credit facility or the availability of alternative financing), may cause us to be unable to pursue or complete an acquisition |
| Our ability to grow our business, particularly through acquisitions, may depend on our ability to raise capital by selling equity or debt securities or obtaining additional debt financing |
| We cannot assure you, however, that we will be able to obtain financing when we need it or on terms acceptable to us |
| In any case, we may be unable to grow our business or expand our service offerings as quickly as we have in the past, and our profitability may decline |
| We may not manage our growth effectively, and our profitability may suffer |
| We have experienced rapid growth in recent years |
| This rapid expansion of our business may strain our management team, human resources and information systems |
| We cannot assure you that we can successfully 23 ______________________________________________________________________ [44]Table of Contents manage the integration of any businesses we may acquire or that they will result in the financial, operational and other benefits that we anticipate |
| To manage our growth successfully, we may need to add qualified managers and employees and periodically update our operating, financial and other systems, as well as our internal procedures and controls |
| We also must effectively motivate, train and manage a larger professional staff |
| Such expansion may result in significant expenditures |
| If we fail to add qualified managers or manage our growth effectively, our business, results of operations and financial condition may be harmed |
| Our revenues, operating income and cash flows are likely to fluctuate |
| We have experienced fluctuating revenues, operating income and cash flows and expect that this will occur from time to time in the future |
| We may experience fluctuations in our annual or quarterly revenues and operating income because of the timing of our client assignments, the types of assignments we are working on at different times, hiring trends and decreased productivity because of vacations taken by our professionals |
| This means our profitability will likely decline if we experience an unexpected variation in the number or timing of client assignments or during the third quarter when substantial numbers of professionals take vacations, which reduces their utilization rates |
| We may also experience future fluctuations in our cash flows because of increased compensation, including changes to our incentive compensation structure and the timing of those payments, which we generally pay during the first quarter of each year |
| Also, the timing of any future acquisitions and the cost of integrating them may cause fluctuations in our operating results |
| A significant portion of Lexecon’s revenues results from relationships with clients and industry professionals maintained by Daniel Fischel, Dennis Carlton and Joseph P Kalt |
| The loss of one or more of them could decrease our revenues and the profitability of Lexecon |
| The success of our acquisition of Lexecon will depend upon our retention of Daniel Fischel, Dennis Carlton and Joseph P Kalt |
| They have reputations in the field of economics for highly specialized expertise as well as important relationships with existing clients and industry professionals |
| Their reputations and relationships are critical to retaining and gaining new client engagements, particularly large, complex matters |
| Fischel, Carlton or Kalt could harm the success of our acquisition of the Lexecon practice |
| We may have a different system of governance and management from the companies from whom we make our acquisitions, which could cause senior professionals who join us from acquired companies to leave us |
| Our governance and management practices and policies do not mirror the policies and practices of acquired companies or their parents |
| In some cases, different management practices and policies may lead to workplace dissatisfaction on the part of acquired professionals with our way of conducting business |
| The loss of one or more key professionals may harm our business and results of operations |
| Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the senior notes |
| Our senior secured bank credit facility provides for a dlra100dtta0 million revolving line of credit, of which dlra91dtta4 million is available for borrowing as of December 31, 2005 |
| Our substantial indebtedness could have important consequences to you |
| For example, it could: • make it more difficult for us to satisfy our obligations; • increase our vulnerability to adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund acquisitions, working capital, capital expenditures and other general corporate purposes; 24 ______________________________________________________________________ [45]Table of Contents • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • place us at a competitive disadvantage compared to our competitors that have less debt; • limit our ability to borrow additional funds; and • limit our ability to make future acquisitions |
| In addition, our senior secured credit facility and the indenture governing the senior notes contain restrictive (and, in the case of the senior secured credit facility, financial) covenants that limit our ability to engage in activities that may be in our best interests |
| Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts |
| Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt |
| This could further exacerbate the risks associated with our substantial leverage |
| We and our subsidiaries may be able to incur substantial additional indebtedness in the future |
| The terms of the indentures governing our senior notes and our convertible notes do not fully prohibit us or our subsidiaries from doing so |
| If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify |
| To service our indebtedness, we will require a significant amount of cash |
| Our ability to generate cash depends on many factors beyond our control |
| Our ability to make payments on and to refinance our indebtedness and to fund capital expenditures and acquisitions will depend on our ability to generate cash |
| This, to a certain extent, is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our senior secured credit facility will be adequate to meet our liquidity needs for at least the next few years |
| We cannot assure you, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our senior secured credit facility or that we can obtain alternative financing proceeds in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs |
| We may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity |
| We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured credit facility, our senior notes or our convertible notes, on commercially reasonable terms or at all |
| We may be required to pay substantial amounts in cash to holders of the convertible notes at the time of conversion prior to maturity |
| As a result of making cash payments on the convertible notes, we may not have sufficient cash to pay the principal of, or interest on, our other obligations, including the senior notes |
| Therefore, we will be obligated to repay the holders of the convertible notes dlra150dtta0 million before we are required to repay principal of the senior notes at maturity |
| In addition, we may be required to pay substantial amounts in cash to holders of the convertible notes prior to their stated maturity at the time of conversion or upon a fundamental change |
| Upon conversion of the convertible notes, we will be required to pay to the holder of a convertible note a cash payment equal to the lesser of the principal amount of the notes being converted or the conversion value of those notes |
| As a result, we may be required to pay significant amounts in cash to holders of the convertible notes upon conversion |
| We may not have sufficient cash funds to pay the conversion consideration at the time of conversion |
| The indenture governing the senior notes generally allows for these payments, and our senior secured credit facility permits these payments in some, but not all, circumstances |
| However, payments of the convertible notes upon conversion could be construed to be a prepayment of principal on subordinated debt, and our existing and future senior debt may prohibit us from making those payments, or may restrict our ability to do so by requiring that we satisfy 25 ______________________________________________________________________ [46]Table of Contents certain covenants relating to the making of restricted payments |
| If we are unable to pay the conversion consideration, we could seek consent from our senior creditors to make the payment |
| If we are unable to obtain their consent, we could attempt to refinance the debt |
| If we were unable to obtain consent or refinance the debt, we would be prohibited from paying the cash portion of the conversion consideration, in which case we would have an event of default under the indenture governing the convertible notes |
| An event of default under the convertible note indenture most likely would constitute an event of default under the indenture governing the senior notes and under our senior secured credit facility |
| The indenture governing the convertible notes provides that the convertible notes are convertible only upon the occurrence of certain events |
| However, we generally will be unable to control timing of any conversion of the convertible notes |
| For example, if a significant amount of convertible notes were converted shortly before a regular interest payment date for the senior notes, we may not have sufficient cash to make the interest payment on the senior notes |
| We may attempt to borrow under our senior secured credit facility to fund interest payments on the senior notes, but there can be no assurance that we will have sufficient availability under that or any successor facility or that our credit facility lenders will allow us to draw on that facility for the purpose of making payments on the senior notes |
| Our indebtedness is guaranteed by substantially all of our subsidiaries and will be required to be guaranteed by future subsidiaries including those organized or that join us in connection with an acquisition |
| Assets of the guarantors may not be available to satisfy our obligations under the notes and senior secured bank facility |
| Substantially all of our subsidiaries guarantee our senior notes and our convertible notes and our senior secured bank facility and their assets secure such indebtedness |
| Future subsidiaries, including those organized or acquired by us in connection with acquisitions, will be required to guarantee the notes and our senior secured bank debt and to pledge their assets as collateral for those obligations |
| Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee can be voided, or claims in respect of a guarantee can be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee: • received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and • was insolvent or rendered insolvent by reason of such incurrence; or • was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or • intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature |
| In addition, any payment by that guarantor pursuant to its guarantee can be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor |
| The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred |
| Generally, however, a guarantor would be considered insolvent if: • the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; or • if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or • it could not pay its debts as they become due |
| 26 ______________________________________________________________________ [47]Table of Contents On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of our senior notes and our convertible notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature |
| We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard |
| We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture |
| Upon the occurrence of certain specific kinds of change of control events, we will be required to offer to repurchase all outstanding senior notes at 101prca of the principal amount thereof plus accrued and unpaid interest and special interest, if any, to the date of repurchase |
| However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of senior notes or that restrictions in our senior secured credit facility will not allow such repurchases |
| In addition, certain important corporate events, such as leveraged recapitalizations, that would increase the level of our indebtedness, would not constitute a “change of control” under the indenture governing our senior notes |